The effect of seasonality in the CPI on inflation expectations
Inflation expectations estimates are among the important indicators considered when formulating monetary policy which tries to meet an inflation target range. These estimates include primarily (1) inflation expectations for the next 12 months, calculated from the prices of CPI (Consumer Price Index)-indexed and unindexed government bonds, and (2) forecasts for the next 12 CPIs as formulated by professional forecasters. This study outlines how these two expectations estimates are affected by deviations caused by the seasonality inherent in the CPI. The first derives from the effect of seasonality on the pricing of CPI-indexed financial assets, including CPI-indexed bonds. The second derives from limited internalization of seasonal factors when forecasters' projections are formulated.